After a series of events with almost comical dimensions, we now have the first case of fraud on the Nasdaq, involving a Chinese small cap company. RINO International (RINO) admitted Friday that it did not enter into two contracts for which it reported revenue during its 2008 and 2009 fiscal years. The stock has been halted by the NASDAQ Stock Market around noon on November 17, and it will remain halted until RINO has fully satisfied NASDAQ's request for additional information. NASDAQ has not specified what kind of information they are looking for, but at this time it seems unlikely that RINO will be allowed to remain listed on the prestigious NASDAQ market. Investors should be prepared to find the stock on the pink sheets in a couple of weeks.

Earlier on Friday, the first official statement in the RINO case came from its auditors, Frazer Frost LLP, in form of a letter issued in an 8-K Filing with the SEC.

In a telephone conversation on November 16, 2010, Mr. Zou Dejun, the Chief Executive Officer of the Company, informed Ms. Susan Woo of our firm, in substance, that as to the six RINO customer contracts discussed in the recent report of Muddy Waters LLC, the Company did not in fact enter into two of the six purported contracts, and a third contract among the six was explainable. When Ms. Woo inquired about the Company's other contracts, Mr. Zou said he was not sure, but there might be problems with 20 - 40% of them. Assuming that these statements were reasonably accurate, it appears that our reports would have been affected if this information had been known to us at the date of our reports, although the effect on the financial statements is currently unknown and cannot be quantified without a thorough investigation. We further note that in a conversation the following day, November 17, 2010, involving Ms. Woo, several directors of the Company, Company counsel, and Mr. Zou, Mr. Zou stated that he was not sure the day before and went back to look into some things, and found that apart from the two problematic contracts, all other contracts are legitimate and can be verified.

The language used in this letter gives those very serious events an almost comical note. The CEO said "he was not sure" and "there might be problems," then "went back to look into some things." And Frazer Frost is "assuming that these statements were reasonably accurate" to conclude that "it appears that" their audited reports were wrong as they might have based their findings on forged invoices.

The very basic conclusion from last week's events is that RINO is not taking their status as an U.S.-listed public company any bit seriously, and that Frazer Frost did a pretty lousy job as an auditor. To fall for forged information of such a magnitude raises the question of what exactly Frazer Frost did attempt to verify, if anything at all. This will likely lead to lasting damage for the reputation and credibility of Frazer Frost and the market has already started to punish other clients of the firm.

In Friday's trading Frazer Frost clients were among the biggest losers. China Valves Technology (CVVT) dropped 15.28% for the day to close at $8.93, snubbing off any upside from a Roth Capital upgrade ($16 price target) before the open. Harbin Electric (HRBN) closed at $16.95, down 10.7%, and the stock finds itself now 30% below the $24 going-private offer it received a couple of weeks ago. Other FF clients affected were Fushi Copperweld (FSIN, down 6.69%), China Fire & Security (CFSG, down 5.86%) and China Medicine (CHME, down 4.20%).

Another stock that is directly affected is Orient Paper (ONP, down 7.00% on Friday). Rino International's fall is the first big success for 2-man (short-selling) research firm Muddy Waters LLP who released a very detailed report about the company on November 10, which led to the reported series of events. Muddy Waters' previous target was Orient Paper, but that company has very determinedly defended itself and its stock price had stabilized recently. With the collapse of RINO the focus might now shift back to ONP and put the stock under renewed selling pressure until the results of the ongoing independent investigation into MW's allegations is presented.

So what will happen next? Will this lead to new or resumed short-selling attacks on a variety of Chinese small caps? Most certainly it will! Short sellers have the whole weekend and beyond to come up with pretty much anything, knowing that whatever they get published will likely have an immediate effect on the stock price, as with the RINO disaster they now have a precedent of Chinese fraud on the Nasdaq. Those companies do already have a hard time defending themselves, even against totally ridiculous allegations. And always keep in mind that not all those attacks will be unfounded, it is very likely that RINO is not the only Chinese company with severe irregularities in its financial statements. But don't make the mistake to interpret this as a "China problem," other than that Chinese companies are just the easiest targets right now.

Will we see a new downtrend for the sector similar to what we all have experienced last summer? That depends on the direction of the general markets in the U.S. and China. It is an undeniable fact that big money is very eager to put their money in (perceived) quality Chinese companies, proven by the China IPO craze of the last three months when most offerings opened for trading some 30-50% above their IPO price. However, if we see the general appetite for risk fading, or the S&P 500 heading for a 10-15% correction, I would expect China small caps to lose value twice as fast. Right now I am still bullish for equities in general, but less so than two or three weeks ago. We should be prepared for both scenarios now.

This RINO situation is serious. Even the biggest bulls will now have a hard time dodging smear attacks on perfectly healthy stocks from China which just happen to have some detail in common with RINO, being it company structure, a sub-par public accounting firm, a weak Board of Directors, or the way they became a public company. It might be that the normal "innocent until proven guilty" is turned upside down for the time being, especially for those companies that do not take their U.S.-listed public company status seriously.

What we should do is looking at business models and trying to understand them. Doing our own in-depth research and see if we can be comfortable with what we find out. Looking at management credibility and perceived credibility. Who is running the company, which investors are backing it? Personally I am no longer willing to risk my money with a $250MM stock that chose to reaffirm Kabani or similar as their auditors, nor am I seeing the point in holding a position in a stock that doesn't even bother to do earnings calls. Talking about big board names here only, for Bulletin Board stocks and companies that are early on their way of maturing he have to set different requirements. However even there, companies that choose not to communicate at all should be treated with extreme caution.

This is not the time to run away from China stocks. Smart money will always look for value, and you have to find out where the value is, what companies you want to invest in, and why exactly you would do that. Re-evaluate your holdings, make adjustments now, and prepare yourself for possible "bargain hunting" with quality stocks that might get beaten down in the RINO aftermath, but don't deserve to be treated in the same way for reasons you have to determine for yourself.

I am making several adjustments to the China Model Portfolio today:

Changda International (CIHD) is currently trading at $0.75, down 76.20% for the year and down 69.76% from its April 5 high at $2.48. The Trading China Tracker Score is 20 (Strong Buy).

Changda has posted strong third quarter numbers last week, however an equity raise is still looming. CIHD has not reached our price target of $1.00 yet, however we are locking in profits here to protect our gains in the light of the RINO situation. We are closing the position here for a gain of 78.57% or $3,927.

Gulf Resources (GFRE) is currently trading at $10.53, down 9.70% for the year and down 12.25% from its April 15 high at $12.00. The Trading China Tracker Score is 13 (Strong Buy).

While I have little doubts about the integrity of Gulf Resources, the stock has been a target before, also mentioned along RINO in the infamous Barron's "Beware..." article. I believe it is prudent to secure profits here as this is one of the stocks that might see a short-selling attack. We are closing the position here for a gain of 61.75% or $3,087.

Renhuang Pharmaceuticals (CBP) is currently trading at $2.41, up 145.91% for the year and down 19.67% from its April 9 high at $3.00. The Trading China Tracker Score is 16 (Strong Buy).

Renhuang is close enough to our price target now, so we can take profits here as well. We are closing the position here for a gain of 67.36% or $3,367.

Wonder Auto Technology (WATG) is currently trading at $8.50, down 27.60% for the year and down 33.44% from its April 9 high at $12.77. The Trading China Tracker Score is 5 (Hold).

Wonder Auto disappointed us with their third quarter report. Account receivables more than doubled for the quarter and the stock still couldn't get above a "Hold" rating on the China Tracker. I would also expect the company to upgrade to a Big4 auditor as soon as possible. We are closing the position here for a loss of 3.30% or $164.

ZST Digital Networks (ZSTN) is currently trading at $7.25, down 17.24% for the year and down 14.51% from its November 8 high at $8.48. The Trading China Tracker Score is 10 (Buy).

We are also selling our ZSTN position here. The only reason is that we are not entirely comfortable with the company's business model, there are open questions about the reported margins and future prospects (GPS) which lead us to believe that ZSTN does not pass our high quality standard for senior exchange stocks at this time. We are closing the position here for a gain of 29.46% or $1,471.

The merging company, Fujian Zhangzhou Dingneng Bio-technology Co. through Ding Neng Holdings (Ding Neng), began operations in 2006 and all of its revenue are, and in the near-term will continue to be, derived from the sale of biodiesel produced at Ding Neng's production facility in Zhangzhou City, Fujian province.

After the acquisition is completed, CHIO's existing stockholders are expected to own approximately 10.5% of the outstanding shares of the company, Ding Neng shareholders will own 85.0%, and 4.5% will be issued to Maxim Group LLP for services provided to complete the acquisition:

CHIO intends to apply to Nasdaq to retain its listing upon completion of the acquisition. Nasdaq's approval will require that the post-acquisition entity will meet the initial listing requirements of the Nasdaq Capital Market, most importantly a minimum bid price of $4.00 per share. To achieve that, CHIO and Ding Neng have agreed to effect a reverse stock split at a ratio of not less than 1:20 and not more than 1:40, immediately prior to closing of the acquisition.

As CHIO is currently considered a public shell company, the merged entity will have to meet all of the rather strict requirements for an initial Nasdaq listing. At this point its seems unlikely, even with a 1:40 reverse split and "new CHIO" being able to meet the $4 bid rule, that the Nasdaq listing can be saved. Investors should be prepared to find new CHIO being quoted on the OTC Bulletin Board.

The agreement contains certain conditions to closing set by Ding Neng, the deal might still fall apart at this point. The Company must have been continuously listed on the Nasdaq Capital Market through the date of closing. The proposed name change to China Bio-Energy Corporation must have been approved by the company's board and shareholders, Nasdaq and FINRA. And, most importantly, no litigation, proceeding, investigation or inquiry will be pending or, to the company's knowledge, have been threatened.

Financials

Ding Neng Holdings' total revenue increased from $9.04 million in FY 2008 to $15.3 million in FY 2009 and $14.8 million in the first six months of 2010. Net income increased as well - from $1.22 million (2008) to $2.06 million (2009), and reaching already $3.24 million for the six months ended June 30, 2010.

It should be noted that reported net margins of 21.8% for 2010 are staggeringly high for a biodiesel business. Ding Neng reported net margins of 13.5% for both FY 2008 and 2009, which is more in line with competitors like China Clean Energy (CCGY). China Clean achieved net margins of 12.0% and 11.3% for the June quarters of 2010 and 2009, respectively. I couldn't find an explanation for the margin explosion at Ding Neng in the filing.

If we project Ding Neng's six months results on the full year 2010, using a sort of best-case scenario where the explosive growth rates (213% net income growth year-over-year) can be sustained for the second half of the year, we get to these estimates for FY 2010: Total revenue of $32 million (up 109%) and net income of $7 million (assumed net margin of 21.5%).

Please note that there are some discrepancies in this calculation. Ding Neng said that the annual aggregate capacity of their Zhangzhou biodiesel facility is approximately 40,000 tons. China Clean has reported a most recent average selling price of $682 per ton for biodiesel (up from $569 in 2009), and if we use this number we get to a maximum revenue potential for Ding Neng of $27.3 million per annum with their facility sold out and running at full capacity. Or $13.64 million for the first six months compared to the $14.83 million the company has already reported. Ding Neng must achieve much higher prices for their biodiesel than China Clean to make those numbers all work out.

Valuation

Ding Neng reported trailing twelve months earnings of $4.26 million and my best-case projection for FY 2010 net income is $7.00 million. Competitors like CCGY and China Integrated Energy (CBEH) are currently trading at 7 times earnings. Given that 2011 growth projections for Ding Neng are uncertain as the company is currently running at full capacity, has a short operating history, and growth based on margins that are about 80% above industry average (CBEH's net margin is also in the 12% range), I would set the fair value for "new CHIO" at the 5x earnings level.

This leads me to believe that a fair market capitalization for the post-acquisition entity should be in the $25 million to $35 million range. However, at CHIO's November 12 closing price of $0.13, and using the terms of the reverse merger agreement, the market capitalization of the new entity is currently $57 million, valuing the company with a P/E ratio of 13.4 and forward ratio of 8.2.

Personally, I would not touch the stock above a price per share of $0.05, and even then investors should be prepared for a delisting of CHIO from Nasdaq, as the proposed reverse stock split at a ratio of max. 1:40 won't be sufficient to maintain Nasdaq's required minimum bid price. It seems unlikely at this point that Ding Feng's conditions for closing will be met, and I would not be surprised if the deal will fall apart completely.

It's earnings season again and there are two stocks that caught my attention last week. I have added them to the China Model Portfolio at Friday's closing price.

China XD Plastics (CXDC) is currently trading at $5.62, down 29.84% for the year and down 23.54% from its April 23 high at $7.35. The Trading China Tracker Score is 10 (Buy).

China XD produces speciality plastics for the automotive industry. It is an established player with many multinational customers including Audi, Mazda and Volkswagen. The company reported very strong earnings for the third quarter, grew revenues more than 80% year over year, and beat analyst estimates by a wide margin. It is easily the cheapest of the U.S.-listed auto parts plays, yet the company doesn't get any respect. Rodman & Renshaw believes CDXC is a prime target for private equity at this price. It might be the next company to receive a going private proposal, following HRBN and FSIN.

U.S. China Mining Group (SGZH, formerly Songzai International Holding Group) is currently trading at $6.16, down 24.05% for the year and down 42.49% from its April 7 high at $10.71. The Trading China Tracker Score is 16 (Strong Buy).

This coal mining company posted strong numbers in a 10-Q filing on Friday. No press release has been issued yet, I would expect this to follow Monday. SGZH posted revenue growth of 92.7% and net income growth of 39.6% for the third quarter, net margins climbed to 21.5% in the period. The outlook for 2011 is fabulous. SGZH will resume production at its Xing An mine this month, production there was halted completely in February of 2010 for upgrades, and the company expects to be at full production by May of 2011.

For the next few quarters, SGZH will be able to post strong growth in both revenue and net income compared to the year ago period. I expect the company to generate FY 2011 earnings per share in the $1.30-1.50 range, which makes it easily the cheapest of the U.S.-listed Chinese coal stocks here. Remember that SGZH posted EPS of $1.63 and $1.73 for 2009 and 2008, respectively. And with the completed mine upgrades, intended to "increase efficiency, safety and boost production" at Xing An, it seems likely that the company will soon meet or exceed pre-closing production numbers.

Sino Agro Food (SIAF) is currently trading at $1.72, up 36.50% for the year and at a new 10-month high. The Trading China Tracker Score is 9 (BUY).

Sino Agro Food is an integrated, diversified agriculture technology and organic food company operating in China. The Company is producing high margin agricultural products and intends to focus on meeting the increasing demand of China's rising middle class for gourmet and high quality food items. Currently Sino Agro Food produces and markets products like organic beef and lamb products, pollution-free fish from aquacultures, patented high quality animal feed for cattle, sheep and other animals, organic fertilizer, 100% pure organic milk and dairy products, and Hylocereus Undatus, a species of cactus better known as Dragon Fruit.

Trading China is on a mission to improve the transparency of U.S.-listed Chinese companies, which we believe will strengthen investor confidence in those stocks that deserve value investors' attention. The management and investor relations of SIAF have been very responsive to our questions, and we are proud to start the new series with Sino Agro Food. Please read the complete, unedited interview below.

1. Internal Controls: What is the current status of your company's Sarbanes-Oxley Act (SOX 404) compliance, establishing effective internal controls over financial reporting? What are the plans for improving your internal accounting and finance teams, if necessary?

SOX compliance for a company at the size and stage SIAF is currently at would for the most part be cost prohibitive. SOX is mainly aimed at internal controls, which would be handled by a CFO and an audit committee. The Company is just emerging out of start-up and in 2011 will just begin to start seeing its business plan mature. I imagine the Company is still a good year or two away from needing to expand its management team and audit controls.

2. Board of Directors: Does your company have experienced and active independent directors? What is their level of involvement in management's decision and financial reporting?

Currently there are no independent directors, the current board which is made up of the management team is sufficient as the company emerges from start-up. Management however intends to elect an independent board as this will be a prerequisite for listing on a major exchange. Once the company is out of start-up and looking towards expansion this will be one of the items I'm sure management will address.

3. Chief Financial Officer: Has your company hired a full-time CFO who is actively involved in day-to-day management decisions and spends the majority of the year close to the company's operations?

Again, the Company is not quite at that stage where a CFO would have a positive net effect. I do believe though that a CFO would be the next major addition to the management team in the next year or so as the Company's operations start to run at full capacity.

4. Independent Auditor: Please describe your experience with your U.S. GAAP auditor. How many people do they send over to do the audit, how long does it take them to complete the audit?

Currently the Company's independent auditor is Madsen and Associates, CPA, which is a PCAOB registered firm. Madsen works alongside its affiliate in Hong Kong to provide the Company with its financial reporting. It has taken some time to get the Company financial statements over to US GAAP. Also growth has been pretty rapid during the start-up phase and working with the Company's joint venture partners while converting to GAAP has had its share of bumps along the way. I feel pretty confident though moving forward the Company can complete the audits within the normal timeframes as everything is brought current. There are plans to change the fiscal year end to June 30th once the Company is registered and all the financial reporting is on track. The biggest problem with a Chinese company that has a December 31st fiscal year end is the Chinese New Year which tends to slow things down administratively.

5. Big 4 Auditor: Have you considered engaging a Big 4 auditor (Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers) to further shape investor confidence? If not, please provide the reasons.

A big 4 auditor just wouldn't make economic sense at this stage in development. The Company is still very young and hiring a big 4 just to shape investor confidence would probably not be a smart economic choice. For the current size of the Company, the current auditor is sufficient and falls under the same oversight by the PCAOB as a big 4 would.

6. Analyst Coverage: How many sell-side analysts are currently covering your stock? Do you see analyst coverage expanding in the near future?

Right now I'm not aware of any. We have had a few articles written by some third party juniors, but nothing from a recognized source. I imagine that will change though once the Company is fully reporting. We already have some institutional interest and investors so as I see it, it's just a matter of time.

Management has been good about giving guidance. I see that continuing as the Company grows. Currently Management has forecasted $0.29 diluted EPS for 2010 and $0.49 diluted EPS for 2011.

8. Share-based Compensation: What is the company's position regarding paying for services with newly issued shares or warrants instead of cash?

The Company really hasn't issued much stock for services. Most of it has been either issued for funding or to pay down debt. My view is that Company issuances of stock are reported in Company filings. Each investor can see how management is handling the equity side of things and make a decision as to whether or not to invest. This is pretty subjective depending on the investor.

9. Shareholder Dilution: Are there plans to raise capital in the next 12 months or can growth be funded from working capital and operating cash flow?

The Company currently has enough cash flow from operations that it doesn't really need additional funding. Management did a pretty good job of estimating start-up costs and raised the funding it needed early on when it went public in late 2007. I do believe however as the Company enters into an expansion phase that raising capital will be a logical step. Management has said on several occasions though that it intends to wait until it is listed for a secondary offering and to do so only if the cost of capital permits. Also, the Company has substantial "land usage rights" that it can collateralize for low interest rate bank loans through the Agricultural Bank of China. In either case the Company has more than one option at funding expansion.

10. Acquisitions and Investments: Is your company currently looking into acquisition targets or investment opportunities? Will you remember disclosing to shareholders how accretive an acquisition will be to earnings per share, or when the company expects the investment to start paying off with revenue contributions, etc.?

The Company's current strategy is based more around joint ventures than it is with acquisitions. I don't see any acquisitions on the horizon but I do expect to see new joint venture projects with both existing partners and maybe a few new ones.

11. Buybacks and Dividends: Does your company consider buying back own stock, possibly launching a buyback-program in the near future? How about returning some of the net profits to shareholders in form of a dividend? Even a small dividend might make your company attractive for a huge new class of investors/funds.

Yes, we are proud to be one of the few companies in our space that has provided a dividend to shareholders. Management believes strongly in rewarding investors, it helps maintain a strong shareholder base and as a side effect helps lower cost of capital. It just simply makes sense.

12. Press Releases: Does your company update investors regularly - at least once a quarter - with an official press release about business developments and short-term outlook?

Yes, we currently have what we feel is a pretty good investor relations program in place.

13. Conference Calls: Is your company holding regular conference calls for earnings releases or material events? If not, why not, and are there plans to change that in the near future?

Our last two conference calls have been on an annual basis but I do expect the Company will begin conducting quarterly calls once the Company has registered with the SEC.

14. Senior Exchange Listing: does your company plan to list its common stock on a senior U.S. exchange (Nasdaq, NYSE, Amex)? Do you expect such a move to be completed within the next 12 months?

The Company is expecting to file its Form 10 with the SEC in the next few weeks. Once registered the Company can be quoted on the OTCBB, but I expect the Company will pursue a listing on the NASDAQ or AMEX once it has cleared comments with the SEC and completed taking the necessary steps to meet listing criteria.

15. U.S. Public Company: Are you satisfied with the performance of your common stock on U.S. exchanges over the past 12 months? What do you see as the biggest problems Chinese companies encounter when being listed in the United States?

I believe we have preformed quite well overall. The Company is currently one of the top performers on your very own CGS (ECSC) index despite being a non-reporting Company. As for future obstacles, I think the biggest obstacle has been being a non-reporting company. Considering where the Company has come from in respect to market acceptance, I can only imagine that will get better once the Company is listed. The overall problem I see facing Chinese companies is general acceptance by the market. There was a pretty nasty negative campaign waged against the space, but the cloud does appear to be dissipating some.

16. Investor Confidence: Please feel free to add anything that hasn't been covered in the previous questions: new initiatives, future plans, or current developments. Why do you think new investors should invest in your stock and current shareholders should hold on to their shares for the long-term?

With agriculture making up some 13% of China's GDP and a very aggressive pro-agriculture policy by the central government, I think the Company is in the right space at the right time.

What a beautiful run it has been for our China Model Portfolio in the last six weeks. The portfolio value is up by 44.34% since September 24th, and the sentiment for China stocks couldn't be better right now. Several of our portfolio positions have reached the price targets we have set, so we are making a couple of changes this weekend.

Please remember that the model portfolio is designed for long-term oriented value investors, set up to be as transparent as possible, and transactions are allowed only on the weekends at Friday's close. Contrary to many other model portfolios out there, we do not claim to have hit the bottom or top of a move, and transactions can be easily reviewed and modeled into a real portfolio. In theory the performance of our China portfolio should be lagging those that can react on intra-week news, price movements, earnings reports and momentum, so we are quite proud of the performance so far.

Closing Positions

Charm Communications (CHRM) is currently trading at $12.23, up 28.73% from the IPO price and down 2.09% from its November 4 high at $12.49. The Trading China Tracker Score is 5 (Hold).

Charm has reached our target price of $12.00 last week and we are closing the position here for a gain of 46.64% or $2,330. While I still believe that the company has a very bright future, the recent price appreciation has lowered the China Tracker Score from 12 (BUY) to 5 (HOLD) and we are locking in the profits here.

China MediaExpress (CCME) is currently trading at $19.61, up 85.00% for the year and down 2.44% from its November 4 high at $14.79. The Trading China Tracker Score is 12 (Strong Buy).

CCME has also reached our target price ($20.00) last week. This has worked out much faster than expected. China MediaExpress is scheduled to report Third Quarter earnings on Monday before the open, what is widely expected to be a very good report. However, as our price target has been reached, we are closing the position here for a gain of 131.25% or $6,555.

Longwei Petroleum (LPH) is currently trading at $3.50, up 29.63% for the year and down 1.13% from its November 5 high at $3.54. The Trading China Tracker Score is 7 (Hold).

Longwei has been doing very well since its uplisting and the stock reached our price target last week, even closed at new highs on Friday. There is a good chance that LPH can establish a new trading range above the $3 mark now, but we are locking in gains here and closing the position for a gain of 76.77% or $3,838.

Tianli Agritech (OINK) is currently trading at $7.73, up 28.83% from the IPO price and down 4.93% from its November 5 high at $8.13. The Trading China Tracker Score is 8 (Buy).

OINK is the second stock in our model portfolio that established new all-time highs on Friday. I believe it has further upside from here, but as we can make changes to our portfolio positions only on the weekends, we will stick with our initial price target ($7.50), that has been surpassed now. We are closing the position here for a gain of 105.58% or $5,280.

New Additions

SinoHub (SIHI) is currently trading at $2.42, down 39.50% for the year and down 25.77% from its April 1 high at $3.26. The Trading China Tracker Score is 4 (Hold).

SinoHub is expanding its virtual contract manufacturing to serve mobile phone distributors in emerging markets outside of China. We do like the stock here because the prospects for FY 2011 are bright. SIHI is currently followed by 4 analysts. All 4 give the stock a positive rating, and the average price target is 5.25, which implies 116.94% upside from current price. Rodman & Renshaw raised their estimates and price target ($7.00) in late October. The stock is currently trading at 2010e and 2011e P/E of 4.4 and 3.5, respectively.

Agfeed Industries (FEED) is currently trading at $3.17, down 36.60% for the year and down 34.64% from its April 14 high at $4.85. The Trading China Tracker Score is -5 (Sell).

Agfeed is a Chinese hog breeder and producer of animal feed that came under pressure as severe floods led to the loss of over 16,000 live animals in the Second Quarter. Thus, results for the first half of 2010 were disastrous and the Trading China Score is currently at negative five, or Sell. But this could be an excellent turnaround play for several reasons.

Rodman & Renshaw sees fully diluting EPS climbing from a measly $0.02 in 2010 to $0.59 in 2011 and $1.03 in 2012. The firm has a price target of $7 on the stock and notes that this target "does not include the impact of additional production from the five western style farms being constructed in Dahua and Xinyu." All in all a very favorable risk-reward ratio here, so we are adding FEED to our model portfolio with a price target of $6.00 based on 6x 2012e EPS.

Jade Art Group (JADA) is currently trading at $0.41, down 39.73% for the year and down 62.40% from its April 5 high at $1.09. The Trading China Tracker Score is 16 (Strong Buy).

Jade Art Group is a producer of raw jade that wants to expand into the retail business. I believe such a move would be very positive as the market for luxury goods is expected to see strong growth in the years to come, with the Chinese consumer having more and more money to spend. JADA has been lagging all moves in the China small caps space and is still trading at a P/E of 3.4 with 45% of its market value in cash. I expect the traditionally strong Q3 earnings report to serve as a trigger for a higher share price.

I believe investors should own U.S.-listed Chinese stocks that are focused on domestic consumption. Those stocks will see double benefits from current developments and it is hard to imagine that investors won't see stellar returns with a buy-and-hold strategy with Chinese consumer stocks. Here's why:

China is in the midst of a gigantic transition from the world's number one exporter and producer of goods to the leading consumer nation of the planet. While its general economy grows 8-10% per year, domestic consumption already grew about 18% year-to-date. We get widespread reports about rising wages in China and about government incentives to further stimulate the domestic economy. However, the domestic economy is nowhere close to being strong enough to compensate the negative impact on international trade if China continues to appreciate its currency. More aggressive measures to strengthen domestic consumption are very likely at this point.

The rising Yuan is the driving force behind these developments. China is facing enormous pressure from all its trade partners to appreciate its currency, but instead of opting for a rapid full appreciation, China is looking at gradual appreciation of up to 5% each year for the next several years. Auriga came out with a note this week, estimating the total scale of appreciation to be between 25% and 40% in five years. The firm calls gradual appreciation a "determined government policy" and "too big to ignore" for investors.

Chinese companies targeting domestic consumers will find have a larger market for their products with strong and sustainable growth. They will have more potential clients and customers and those will have deeper pockets. Underdeveloped industries like domestic and international travel, luxury goods, entertainment and advertising will rise out of infancy, and purchasers of manufactured goods - especially in rural China - will benefit from subsidies and government stimulus.

The double benefit for U.S.-listed Chinese companies is of course the stronger Yuan. Those companies derive their revenue in Chinese Yuan and report their numbers in U.S. Dollar. Additionally to generating higher revenues and earnings in Yuan those will be worth more in U.S. currency, and 25-40% is a significant amount. And don't forget that the Yuan appreciation will also affect most of the companies' assets.

It's almost a "no-brainer," however the key to success for investors is to pick quality names, companies that are all set to benefit from these developments. Look for healthy quality stocks in industries like advertising, meat processing, agriculture, travel, entertainment, home appliances, automobiles, liquors, gambling, and there should be many more.